The gift of an Education Fund

You want the best for your children or grandchildren – nutritious food, warm clothes, an active lifestyle – and importantly, an education fund that will set them on the path for a happy and successful life. But a good education often comes at considerable expense.

The 2017 Household Expenditure Survey found Australian households were spending more each week on living and learning than in previous years. In fact, the biggest increase in expenditure was on education, up 44 percent since the previous survey in 2011. According to the Australian Bureau of Statistics (ABS):

“The hike in education spending mainly came from spending on school fees, which rose by almost half from 2009-10 to 2015-16.”

In an environment where wage growth is stagnant and education expenses increase at a rate far greater than inflation, how can you provide the best education possible for your children or grandchildren?

Investment bonds – a tax effective savings vehicle

Wouldn’t it be great to know you had the school fees covered with an education fund? One less expense to worry about, and the confidence of knowing you can make the best educational choices without being unduly influenced by the price tag.

An investment bond is an insurance policy, with a life insured and a beneficiary, which operates like a tax-paid managed fund. And as with a managed fund, you can select from a broad range of underlying investment portfolios, which range from growth-oriented assets such as equities, through to defensive assets such as fixed interest. They can also include other asset classes and combinations of assets.

An investment bond has several advantages over other investment vehicles:

Tax effectiveness

Returns from an investment portfolio are taxed at the company tax rate (currently 30%) within the bond structure and are then re-invested. They are not distributed as income, so you do not need to include them in your annual tax return. If the bond is held for 10 years, all funds are distributed tax-free.

Depending on the investments in the underlying portfolio, dividend imputation credits may apply, making the effective tax rate less than the prevailing company tax rate. This compares very favourably with the top marginal tax rate of up to 49%.

Capital gains tax simplicity

As earnings are automatically reinvested in the bond, reinvestment dates do not need to be tracked for capital gains tax purposes. In addition, the bond holder can switch between investment options without triggering a capital gains tax liability.

Affordability

There is no limit on how much is invested in an investment bond – it may be as little as $500 or as much as $5,000,000! Importantly, you can make additional contributions every year, up to 125% of the previous year’s contribution – a terrific way to build up an education fund.

Flexibility

Investment bonds are most tax-effective when held for 10 years or more, but the funds can be withdrawn at any time as required. If the money saved is not in fact needed for education, it can be used for any other purpose.

Ownership and transfer

If saving for a child’s education, the investment can be held in the child’s name once aged 10 or more. This means however, the child will gain full control to decide how to spend the money once he or she reaches age 16.

The preferred option in most cases is to hold the bond in the name of the parent or grandparent. This avoids penalty tax rates for children under 18 if they make withdrawals in the first 10 years, the adult stays in control, and the bond can be started for a child younger than age 10.

This is an option preferred by many grandparents putting money aside for a grandchild’s education. If ownership is transferred to the child, the original start date is retained for tax purposes.

Estimates suggest the cost of educating a child born this year could reach as high as $66,320 in the government sector and nearly $500,000 in the private sector. Wage growth is unlikely to experience a similar growth trajectory, so it’s important to plan ahead to ensure that educating your children, or grandchildren, does not put unwarranted financial pressure on your family.

Disclaimer:Suitability of a Centuria Investment Bond will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in preparing this document. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) for any investment bond and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. This document is not an offer to invest in any of Centuria’s Investment Bonds. An investment in any of Centuria’s Investment Bonds is subject to risk and Centuria will receive fees in relation to the management of its Investment Bonds as detailed in the PDS. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.